The government will abolish the dividend tax credit from April 2016 and introduce a new dividend tax allowance of £5,000 a year.
The new rates of tax on dividend income above the allowance will be:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers
What else do we know? Well, we don’t know the full story given that the details will be included in Finance Bill 2016. In the meantime, HMRC issued a Dividend Allowance factsheet on 17 August.
This includes some simple worked examples, and contains the following snippets of information.
The allowance is available to anyone who has dividend income.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an ISA will continue to be tax free.
The dividend allowance will not reduce an individual's total income for tax purposes (but it will mean that the individual does not have to pay any tax on the first £5,000 of dividend income received).
Dividends within the allowance will still count towards an individual's basic or higher rate band and may therefore affect the rate of tax paid on dividends in excess of the £5,000 allowance.